Current price 72, Mcap 169cr (as on 09.02.18)
Listed on BSE
Background
Inditrade Capital Ltd. (Inditrade) was set up in 1992 in Kochi as JRG Securities Ltd., and was engaged in broking and distribution of financial products.
Barings Pvt. Equity Partners India were the promoters of the company since 2009, and as of December 2015, held 49.4% of the shares through its affiliates/funds [Duckworth Ltd (subsidiary of Baring India Private Equity Fund II Ltd; 45.6% share) and Baring India Pvt. Equity Fund III Listed Investments Ltd. (3.8%)]. In February 2016, a group of investors that included Sudip Bandyopadhyay (SB) and 2 corporate entities Juno Moneta Technologies and AT Invofin India purchased the stake from Barings and made an open offer to the public to acquire additional 26% of shares. The price paid by the new investors was Rs. 42.5 per share as compared to book value per share of Rs 39.6 as at March 2016.
As at December 2016 (after completing the formalities for takeover of shares and open offer) the new promoters owned 71.77% of the company. SB directly owns only 0.21% of the company, and it is likely that he has indirect stake through the 2 corporate entities, as well as future stake through ESOPs. These entities also have a certain Alok Tandon as a key person.
Current Business
Inditrade in its current avatar is engaged in equity/commodity/insurance broking (constituting 40% of total revenue), client financing (21%) and distribution of financial products (23%). It has 29 branches and 350 franchisees with over 1.5 lakh registered customers across Kerala, Tamil Nadu, Karnataka, Andhra Pradesh, Telangana and Maharashtra.
Future Businesses – focus areas
Agri Commodity Funding
The company has also been involved in agri-commodity trading and financing, and this received further impetus by acquisition of the agri-commodity business of Edelweiss group in November 2016.
This is a highly unorganized market (about 75-80%) and presents a focused player like Inditrade ample opportunity to grow. Warehouse receipt management and certification is increasingly becoming more regulated, standardized and professionally managed, minimizing frauds that used to plague the sector in earlier times.
Inditrade offers funding against exchange traded non-essential commodities stored in exchange recognized warehouse, for short duration of 1-3 months, to commodity traders and processors. Commodity price risk (and to a large extent, default risk) is mitigated by simultaneously selling futures contracts of the commodity of similar duration on the exchange through their broking division. This enables them to offer high loan amounts of as much as 95% of the value of the commodity in a relatively quicker time at fairly attractive rates of 14-15% (much of the competition is from banks which charge lesser rate of 12-14% but take time and offer only 70-80% of the value).
Microfinance
Inditrade secured its microfinance lending license in March 2017 and commenced microfinance business in April 2017 by initially targeting the semi-urban industrial belt of South Maharashtra and Tamil Nadu. It has 9 branches in both states and plans to have 15 more branches by end of FY2018 with a loan book of Rs 100cr (half each in Maharashtra and TN).
They claim to be the first in the industry to have a completely digitized prospecting-approval-disbursement-collection process which involves eKYC and GPS tracking, online credit checks (through rating agencies Equifax and High Mark Ratings), and money transfer to bank accounts. Use of digital systems are likely to enable better risk management. The maximum credit provided to a single borrower is Rs 30,000 over a period of one year, with weekly collections. The microfinance business has currently 50 employees who have been incentivized by making them part owners, infusing 1/3rd of the equity capital.
As per recent press report of November 2017, Inditrade’s microfinance business had 17 branches and a loan book of Rs 40cr. It is in the process of acquiring 80% stake in another microfinance entity Varam Capital (25 branches spread over TN and Chhattisgarh, with loan outstanding Rs 100cr) at a cost of Rs 40cr. Whether this is paid in cash or shares is not known as of now.
Quick comment on Financial performance
The financials are audited by Haribhakti (including 4 out of 6 subsidiaries, the remaining 2 having insignificant contribution as on 31.03.17) which provides some comfort.
FY17 was the first full year of operations under the new management. Till recently the company has generated revenues only from its traditional business of broking, private funding and distribution. This is expected to continue to grow at a healthy pace in future given the sector tailwinds. The new businesses of agri-commodity funding and MFI are likely to start having an impact from early FY19.
The company has grown its revenues year on year by 39% in Q1-18 and 33% in Q2-18. However expenses, particularly employee, finance and administration costs, have grown at a faster pace over these periods as the company is focusing on growing its commodity financing and microfinance businesses. The company started borrowing funds in Q4-17 and would have deployed them during FY18. These expenses are in the nature of upfront investments, and should start generating returns in future periods.
Q3 income is up from 10.8cr to 17.8cr, up by 65% (but we have to remember we are comparing with a demon quarter). PAT is up from 0.13cr to 1.5cr. Momentum of Q2 also appears to be sustaining (revenues of 16.4cr and PAT of 1.6cr). Finance cost has doubled in Q3 over Q2 indicating that company has resorted for borrowings to fund its lending businesses (there is a big difference between the interest cost figures in P&L and Segment reporting, which needs clarification). Debt/equity ratio as of Sep 17 was less than 0.4.
Broking is a volatile business and is highly correlated to the vagaries of market activity. It can be seen from table below that broking is around 40% over last 3 quarters. And client financing is 21%. Financial distribution is decreasing is and others is increasing (what does others constitute is not known at present).
Summary
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Although in a crowded space (NBFC), the company appears to have a differentiated business model – particularly (1) agri commodity funding with commodity price/credit risk hedging and (2) sector-focused semi-urban MFI lending to banked and/or tax paying customers (as against the uneducated poor that MFIs are known to target) and leveraging digital information and platforms for more efficient delivery and risk management.
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Existing businesses like broking, client funding and distribution of financial products will continue as bread and butter business with sector tailwinds emanating from digitization and a structural shift towards financialisation of savings.
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The company is contemplating a digital enabled foray into affordable housing finance, which would be a new area for growth.
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The Jockey has relevant experience, financial backing and probably, skin in the game in terms of ESOPs (2 sets of ESOPS have been announced by the company for its employees with exercise price of Rs 37.75 earlier and Rs 83 more recently)
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Current price is around 1.7x of what the new promoters paid to takeover the company
Risks/Concerns
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This is an evolving story and needs close tracking on how the new businesses pan out. The last 3 quarter results have been directionally right. However, it is now 2 years post management takeover in November 2015, and the company needs to start delivering at the bottomline level soon. Broking is a volatile business and it can drag performance in bear markets.
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There is key-man risk as a lot is riding on SB. While he has a slightly chequered past, he seems to have the necessary experience having been involved/started financial service businesses. One wonders why he is still actively appearing on TV (as a financial analyst) recommending other company stocks and why he is mainly based in Mumbai instead of the headquarters in Kochi. Of course, as they say- once an analyst, always an analyst; and maybe SB will continue to be one. Also the MFI business is based in Mumbai.
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As is typical with small/start-up companies, there is the generic risk of over promising and under delivering. In their FY2017 Annual Report the company made a tall claim to achieve a loan book of Rs 5000cr in 3 years (which was later scaled down to 3000cr in a subsequent interview). Even then, this is extremely aggressive/ambitious and while the company may certainly have these as internal targets, it should refrain from public announcements of this nature, so as to manage investor expectations. Such steep targets may also force the company to take undue risks while chasing growth (for instance the price they intend to pay for their proposed acquisition of Varam Capital could be questionable).
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Lending is easy, but key is credit risk management and recovery. The company is still to be tested on this. Their delinquencies/NPAs should be closely tracked, as ideally none (or very little) of it should appear within the 1st year atleast.
Some pointers on valuation
The share was available for below 42.5 for many months post announcement of takeover by the new promoters (till as late as May/June 2017), and would have been the ideal time to buy as we would be getting in at the same price as the new owners. The share witnessed a spurt sometime around Jul-Aug 17 when the target of Rs 5000cr in 3 years became public.
The book value per share as of Sep 2017 was 44 per share, and annualized 9-month EPS is 2.35. The current price of 72 translates into price-to-book of around 1.6x and price-to-earnings of 30x. While the price looks ok on PB basis, the PE looks optically high for an emerging company, and may correct, if the company delays on delivery. However, if the company is able to sustain 30-40% growth at PAT level, this would look attractive.
The company has several subsidiaries, which are not wholly owned, through which it carries on its activities. When applying valuation metrics, some element of holding company discount may come into play.
Disclosure
I hold shares in the company from earlier and also added recently after Q3 results. I am not a registered financial analyst and this is not a recommendation. Views welcome.
